If the world’s stock markets continue to unravel over the next several months, we could experience a tipping point in Global Silver Inventories. In addition, the U.S. Fracking Industry is now facing a new threat which could lead to a serious drop in domestic oil production.
I sat down with Mike Gleason at Money Metals Exchange and discussed these topics and more:
Here are some snippets of the podcast transcript below:
Mike Gleason: One of the main reasons I wanted to have you on today was to talk about the supply situation in silver, because it’s becoming a very big story. Also because you have such a good handle on what’s going on both in terms of the investment demand reported by your array of industry sources, but also what’s going on with mine supplies. So there are a few out there that are better to comment on all these growing silver supply concerns than you, so thanks for spending some time with us and our audience.
Now I wanted to start out by asking you about mine supply. You have been reporting about the global silver mine production. Exactly, what does your research show in terms of how the world’s major producers are doing, and what is the output been looking like over the past, say, 6 to 12 months, Steve?
Steve St Angelo: Normally, we would see this information released in different websites, but I haven’t seen much of it this year. It’s been surprising. Anyhow, one of the more stunning data points came out of Australia. I look at this information everyday … Try to find out when they’re going to release it. Australia actually reported a stunning 31% decline in silver production in the first quarter. In the first quarter of 2014, Australia produced 491 metric tons of silver. The first quarter of 2015, it had fallen to 340. That is a huge amount. I tried to contact the website to see if this was just a glitch, but they don’t really do a pretty good job. Even if they’re going to revise that number, I don’t see it reviving that much. I haven’t seen revisions that are that large.
We had Australia. They’re down 31%. Peru is the number two largest. Australia is actually fourth. Peru so far is up a little bit. I think they’re about 3½% up compared to last year and that’s as of May. Mexico, which is the largest producer … I found this quite interesting. Mexico is down about 7% year-to-date, but they were down 12% in April and 10% in May. Actually, the first couple of months of the year, their production was up slightly. It started to decline in March, and really fell off a cliff in April and May. Mexico is down year-to-date about 7%. We don’t know China’s figures, because they’re the third-largest producer. We don’t know what theirs are, but I think their production is declining. If we just average the top three of the four here, Australia, Mexico and Peru, I think mine supply is down 6%-7%.
Now certain analysts were saying that we were going to see a fall of overall supply, and that includes recycling of about 4%. Well so far, and I think if Australia continues to show a large decline in the second quarter, I think we will see overall production from the mine supply down 6%-7%. So if you add on the scrap supply that is falling, it could be even higher, almost double the estimates that they were supposed to be. This will just cause a little bit more stress in the market as overall supply this year will fall.
Mike Gleason: All of this is pointing towards the fact that we could see silver premium spike massively and almost without notice. You’ve been saying how many may be complacent and view the premium increases and retail minted product as unimportant, because it’s mainly just a production bottleneck. That may be true to some extent or even mostly, but those same people mainly look at premiums on 1,000 ounce exchange bars and argue that that’s all that matters. We haven’t seen a premium increase yet on 1,000 ounce silver bars, so none of this is a big deal, they say. You’ve made the point that when we do see premiums rise on 1,000 ounce bars, it’s basically game over. Explain what you mean there.
Steve St Angelo: I think we need to understand there are three wholesale markets. There’s three markets in the silver industry. There’s the retail. Let’s just discuss retail when it goes to investment. There’s retail investment silver market. There is the wholesale that supplies the retail, and then there is the overall wholesale silver market where silver is stored at the exchanges. They wholesale it. They get their 1,000 ounce bars or whatever, and then they make their silver products that are sold to the retailers. So, we are seeing already shortages in the wholesale market, that is the one that supplies to the retail. We are not yet seeing a shortage in the wholesale market that supplies the entire silver market. However, when it starts to move there, when it gets in there, I think it will happen very quickly. And if we’re seeing between weeks let’s say, four to six weeks to two months delays now on products, that’s because they’re waiting to get silver 1,000 ounce bars and convert them to smaller products.
What happens when they cannot get the 1,000 ounce bars? So when they say, “Now we have a shortage in the wholesale silver market,” well it’s too late. For analysts or investors to say, “There’s really no shortage now,” and so it goes into the wholesale main market, or by the time it gets there, then it’s too late, and there’s very little silver available. I think on the three exchanges that’s TOKOM, the Shanghai Silver Exchange and the COMEX, there’s only 178 million ounces, but that’s overall silver. Half of that or less than half of that is available to the market. So in a huge increase of institutions as well as large investors and hedge funds, they could totally wipe out the system in no time.
Mike Gleason: I know you covered the energy markets of course very closely as well. One of the, I think, main reasons why the metals have been hurt is because they do trade like commodities at times, and oil has of course fallen dramatically over the last several quarters. What do you make of the future of U.S. oil production and supply going forward, given these low prices, now under $40 a barrel? What do you think we have to look forward to there when it comes to oil production, and what kind of impact do you think that may have on the metals?
Steve St Angelo: I just had an interesting conversation, before we spoke, with a gentleman who is in the … Been in the oil industry for 30 years looking for oil. You know what he told me? They’re not looking for oil right now. The conventional oil guys aren’t looking for oil. He is a conventional guy. That’s where the profits are. The profits are in shale, they have never been in shale (unconventional oil). The interesting thing he told me … Do you know what they’re doing? They are looking for injection wells for water. And I didn’t realize this. The problem he sees, and that is not discussed is shale oil produces a lot of water. There’s a lot water, and it has to be injected back into the ground. It can’t just be thrown somewhere above ground reservoir. It’s toxic. He says now they’re having problems because environmental and issues of where to store all this water.
Not only are we going to see declines in shale oil production because the decline rates are so high. So when they stop drilling, and that is starting to take place, we will see a huge fall in production towards the end of this year, especially if prices remain low, and into 2016. On top of that, as production declines, less oil is being produced, but more water. They have to even find more places to put the water. This is going to be a major issue going forward. We may see a double whammy in U.S. oil production, because we may run out of places to inject this toxic water.